Jefferies calls building materials undervalued

Global downturn puts valuations at attractive levels, analysts say

By

GregMorcroft

NEW YORK (MarketWatch) — Economic and housing crises have left stocks in the global building-materials sector significantly undervalued, analysts at Jefferies & Co. said Tuesday in upgrading ratings on seven of the companies it follows.

The Jefferies analysts now have buy recommendations on 16 of the 17 sector firms in their coverage, they wrote in a research report, saying: “Following the recent collapse in share prices, the majority of the companies in this sector are, in our view, substantially undervalued.”

Investors have been watching the housing sector for signs of a rebound for years following the global financial crisis that erupted in 2008. And, while the analysts aren’t predicting a rebound in housing across the board — indeed, they trimmed earnings estimates for the sector by a tad — they argue that the firms are historically undervalued.

As an example, the analysts cited CRH as trading at the lowest ratio on enterprise value to sales since December 1996. “Our mid-cycle based price target of 21 euros is 83% above the current share price,” they wrote.

Moreover, both CRH and HeidelbergCement have “substantial” businesses in aggregates, particularly in the U.S. — a market where “we expect selling prices to continue to increase more rapidly than costs.

“We expect Travis Perkins to continue to gain market share in UK merchanting and to add value through further acquisitions,” the Jefferies analysts said.

Interestingly, the Jefferies report comes on the same day that the U.S. housing market showed some tentative signs of recovery.

The gradual improvement in U.S. home prices continued in June, rising 1.1% from May, according to the closely followed S&P/Case-Shiller 20-city composite index tracking changes in prices. Read more on Case-Shiller.

That news lifted the iShares U.S. Home Construction Index Fund
ITB, -0.11%
by more than 2.5%.

In related news, analysts at Ticnderoga Securities on Tuesday raised the firm’s rating on home builder PulteGroup Inc.
PHM, -0.94%
to buy from neutral with a price target of $6.50.

“While the shares have climbed sharply the last few trading days, we look at this name a bit more broadly with plenty of upside to accommodate expectations for improvement,” analyst Stephen East said in a note to clients.

PulteGroup’s shares, although still down 39% in the past year, rose about 9% Tuesday.

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